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CFA Level I · CFA Level I Exam · Fixed-Income Markets for Government Issuers

An analyst evaluates bonds issued by a government-sponsored agency that has no explicit guarantee from the national government. Compared with a sovereign bond of the same maturity and currency, the agency bond most likely offers:

The agency bond most likely offers a higher yield. Without an explicit government guarantee it carries more credit risk, and it usually trades less liquidly than sovereign bonds, so investors demand a spread over the sovereign yield even if implicit support narrows that spread.

  1. Aa lower yield because of its implicit support
  2. Ba similar yield because agencies are always treated as sovereign
  3. Ca higher yield to compensate for credit and lower liquidityCorrect

Explanation

Without an explicit guarantee, agency bonds carry some additional credit risk and usually trade with less liquidity than sovereign bonds. Investors therefore require a spread over the sovereign yield. Implicit support narrows but does not remove this spread.

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